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Principled Rulemaking Act

As with any regulatory approach, principles-based regulation must be well executed in order to work. A key element is that the principles should have clear meaning. They cannot be vague, as in the United Kingdom, where one finds principles like “A firm must observe proper standards of market conduct” or “A firm must conduct its business with integrity.” To me, those are not principles. They are just glittering generalities that offer no concrete guidance to a firm.

Businesses often use internal mission statements and lists of principles as a tool to align employees with the goals of top management. However, in many instances, the statements are so general that they have no implications for any particular way of conducting business. The truly meaningful statements of corporate philosophy are those that provide strong signals of what type of business directions the firm will and will not take. Similarly, for PBR to work, the principles have to clarify rather than obfuscate. Legislative commentary should include specific examples of conduct that falls outside of the principles, in order to provide further guidance…

…Principles-based regulation is not a cure-all. There are many regulatory problems that are better addressed with bright-line regulation. For example, the algorithm for calculating the Annual Percentage Rate of interest should be standardized and clearly specified by regulators. And any regulatory system will have gaps and flaws. After all, those who design and implement regulations are as human as the people who run the businesses that they regulate. But in an increasingly complex and fast-paced market environment, there are likely to be many regulatory issues where principles-based regulation will prove to be more robust.